Credit: Like it or loathe it, most of us need it to survive. And the kind of credit we have access to is dependent on our credit scores. A mortgage, a car payment, credit cards, and even health care financing all impact and depend on our credit score.
The problem is, there’s a lot of misinformation out there, and if you believe it, you could be doing yourself a disservice. Here are the top myths about credit scores that we have debunked for you.
1. Closing a lot of credit accounts will improve your score
It seems logical, but it’s completely incorrect. Credit scores are calculated in part by something called a debt-to-credit, or credit utilization, ratio. The agencies calculating your score are looking at how much debt you have, and how much available credit you can tap into.
So, if you have 10 credit cards with a combined credit availability of $100,000, and you’ve only used $15,000 of that available credit, your credit utilization ratio is 15 percent. This is considered good: You have 85 percent of your credit unused.
Now, let’s say you close seven accounts, because you just aren’t using them. You still have $15,000 in debt, but now your overall available credit drops to $30,000. Your credit utilization ratio just skyrocketed to 50 percent, and that means your credit score takes a dive.
Do not close credit card accounts like this. Simply put the cards you aren’t using somewhere safe. And if you get the chance to increase your credit limit, do it. As long as you don’t plan to max it out, it will help your credit score. (See also: Stop! Don’t Cut Up Your Credit Cards)
2. The amount of money you make has an impact on your score
Your credit score lists credit accounts, not income from employers. So, whether you’re a CEO making $3 million a year, or an entry-level worker earning $30,000 a year, income is not a factor in determining your credit score. In fact, a rich CEO might actually have a terrible credit score, despite the money, because of a bankruptcy or series of late payments in the past.
The only way income can have an impact on your credit score is if you live a Champagne lifestyle on a beer budget. If you are maxing out your cards, making minimum payments, and missing payments altogether, you will see your score take a big hit.
3. Credit scores change just a few times a year
Credit scores are changing all the time. The information used to calculate your score comes from the financial institutions you do business with. If you miss a payment, that will be reflected pretty quickly. If you close several accounts, that information will impact your score a lot sooner than in three to six months.
In fact, if you look at your credit score right now, you will see when the last updates were made. Sometimes, it will be a matter of hours, rather than days or weeks. For this reason alone, you should be checking your credit…